17 Feb Private Business Purchase-Sale Transactions are Still Getting Done

Yes, many banks are still lending.
Yes, some businesses are still doing well.
Yes, some business purchase and sale transactions are getting completed.

With that being said, the economy IS very weak and, yes, bank financing is much harder to come by today.

My firm closed another deal last Friday. It was another lower middle market size deal. Yes, the sellers might have gotten a little bit more money a year ago but they were ready to “do something different”. That is, retire.

The deal was also pretty typical in that it was a “leveraged buyout”: a high amount of debt relative to the equity.

The deal was not without its challenges. For example, the original bank that was going to finance the transaction pulled out in the 11th hour. The buyer thought it was the end of his dream to buy a business but, after some encouragement and assistance, he secured the necessary financing from another bank. Incidentally, a small local bank.

The “assistance” included “help” from the seller herself in the form of seller financing. A seller note that was, of course, subordinate to the bank (senior) financing. This seemed to do the trick and left the business seller with an acceptable amount of cash at closing but also “some skin in the game” in terms of a financial need for the business to succeed (and a vote of confidence that the business would and could succeed).

Studies have shown that 70% of small business purchase/sale transactions include seller financing. I have always said that there is some practical logic in seller financing. The first is from the buyer’s perspective. That is, nobody knows the business like the seller and so it makes sense to, in a sense, make the buyer “put his money where his mouth is”.

The second practical logic in favor of seller financing is from the seller’s perspective. That is, a willingness to provide some seller financing will typically allow both the bank and buyer feel more confident about the deal. The result is a higher likelihood that a deal will get done and, in many cases, a higher price for the seller.